William Gale's Argument Against the FairTax

August 20, 2005  ·  Filed under: Criticisms

Below is William Gale’s argument against the FairTax, which appeared in the June 2005 issue of Costco Connection. I will post the “for” argument by Rep. Linder tomorrow, if I get a chance [update: view here].

For more background on this Costco poll, see my earlier post “56% of Costco Members Favor Retail Sales Tax.”

I am inserting numbers in brackets before each of his assertions and/or arguments, so that anyone who wishes may rebut his specific points in the comments.

From the byline: “William Gale is the Arjay and Frances Fearing Miller Chair in Federal Economic Policy at the Brookings Institution and co-director of the Tax Policy Center.”

The notion that a national retail sales tax could effectively replace the entire federal tax system is a pleasant diversion. But careful research has shown that it is a dangerous and ludicrous fantasy.

[1]The 23 percent rate that Rep. John Linder says would be needed is really a 30 percent markup at the cash register. To be clear, under his proposal, if a good costs $100 before the sales tax is imposed, it would cost $130 (not $123) including the sales tax. Most people would call this a 30 percent sales tax.

[2]Academic research shows that the calculations that lead Rep. Linder to this 30 percent rate contain a big mathematical mistake. As a result, using his tax rate would raise the federal deficit by $6 trillion over the next 10 years! Avoiding this would require a 42 percent sales tax or markup.

[3]Rep Linder’s tax rate also assumes there would be no tax avoidance or evasion, even though most serious analysts think the underground economy would thrive under the sales tax. Allowing for just half as much evasion as exists under the income tax would raise the required sales tax rate to above 50 percent.

[4]It seems doubtful that people would tolerate a tax at that rate on necessities such as food, health, house purchases and mortgage payments. (Yes, Rep. Linder’s tax would tax a good chunk of mortgage interest.) [5]The number of people without health insurance, for example, would likely rise by more than 10 million. But if we exempt any of these items, the required rate would have to rise.

[6]The required rate would be even higher if Rep. Linder’s tax were not allowed to impose massive burdens on state and local governments. “Paying” for the federal government by taxing state governments does not reduce tax burdens, it just shifts them. [7]So expect state and local taxes to rise.

[8]Countries that have tried to enforce retail sales taxes at rates above 10 percent have uniformly given up because of evasion. Likewise, no state sales tax has rates that high. If we did impose a 50 percent or higher sales tax, it would be evaded massively.

The tax system’s many problems require serious thinking and creative solutions. But a national retail sales tax is not the answer.

So there it is. Have at it, folks. (Remember to be polite and factual.)

I know answers to some of these objections, but not all of them. (E.g., I’m not up on the history of sales taxes in other countries.) I look forward to reading the comments on this post.

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48 Responses to “William Gale's Argument Against the FairTax”
  1. [1] The 23% in the FairTax proposal is stated as an inclusive rate, the same as the income tax rates. Most sales taxes, such as state sales taxes are stated as exclusive rates. If you make $100 and pay $23 in income tax that is 23%. If you pay $100 for an item and $23 dollars of the $100 goes to the proposed sales tax leaving $77 as the cost of the item, that is 23% (23 / 100 = 23%). But the way William Gale wants to present it is if you pay $77 for an item then add $23 at the cash register its 30% and he is correct but it’s the same amount of dollars just different figuring (23 / 77 = 30%).

    Read more about this at FAQ #47 on http://fairtax.org/ and 47 more great questions on the FairTax

    [2] As I understand the FairTax proposal it is not aimed at increasing or decreasing the amount of taxes collected. It is a way of making taxation much simpler and more visible (we actually see the total amount of taxes we pay). William says the 23% will come far short of raising enough revenue. I don’t go along with this but for arguments sake let’s run with it. The FairTax is proposed to be a revenue neutral replacement for the present tax system . So if 23% won’t cover it then how much are we really paying now. Let’s see. With the complicated income tax and its table of rates its hard to place a figure but let’s say 15% for income tax (probably higher for many people). Then FICA takes 12.4% and Medicare 2.9%.

    Corporations are taxed day in and day out and they have to add that to the cost of doing business. They also have tremendous costs figuring out how much taxes they have to pay and figuring ways to not pay those taxes and paying lobbyist to help them get out of more taxes. All these costs are also added in to the cost of doing business. It is estimated by more educated folks than I that all these corporate taxation costs add 22 to 25% to the cost of goods and services we purchase. Lets say we spend 50% of our income (I’m sure it is much more but this make easy figures) which means we are paying at least 11% (inclusive again) of our income to imbedded (hidden) taxes in what we buy.

    Let’s total this thing: (These are my numbers but they seem to make cents to me.)
    15% Income tax
    12.4% FICA
    2.9% Medicare
    11% Hidden taxes (probably more)
    41% TOTAL TAXES PAID TODAY

    So if Rep. Linder is correct we are going to get a bargain. If he is not we got a long way to go before its not a bargain.

    You may ask how can it possibly be a saving of 18%. Well, if you read the FairTax Book you find out that for every $3 of tax collected there is $1 dollar spent on tax compliance (think that comes to 25% inclusive or 33% exclusive) you may start seeing where the savings is coming form. There is much more good info in the book and at http://fairtax.org/ to help anyone understand the advantages of this simple and FairTax.

    FAQ #’s 5 and 6 on http://fairtax.org/ speak to this question also. The FAQ;s on this website cover all questions I have heard anyone raise about the FairTax.

    The FairTax is a good thing. It will make April the 15th just another glorious day is the USA.

    Dan  ·  Aug 21, 2005 at 8:15 pm  ·  Permalink
  2. In response to; “One Response to “William Gale’s Argument Against the FairTax”” you use the example that if you pay $100 for something the tue cost is $77 but that is not the example that Willian Gale used, He said if it costs $100 then ou must pay an additional $23 in tax, which is correct; Gale also talks a bout skued math and yor reply uses skued math so in trying to rebut you only strengthend his argument.

    Chris Boyle  ·  Oct 21, 2005 at 1:07 pm  ·  Permalink
  3. No matter how you crunch the numbers, the Fair Tax is revenue neutral. The same dollars will be collected as with the income tax. With the Fair Tax we just have a better handle on the cost of government. No more smoke and mirrors as with our current system. The best part is that all those who avoid paying their fair share of income tax because of loopholes, and cheating will have a tougher time doing so with the Fair Tax. Yes, there will be cheaters, but it will take two to tango. Plus, more people will be contributing to the total amount of tax collected. Do criminals, illegal aliens, or tourists currently contribute? I don’t think so. By eliminating corporate taxes American companies will be more competitive thus creating more jobs thus more spending.

    Do you realize we are already paying a consumption tax in addition to our income taxes? The current consumption tax is the embedded taxes and compliance costs that are passed on to us each time we pay for a product or service. I would much rather pay a 23%, or as some people say, 30% consumption tax rather than a 15% income tax plus 15.3% for S.S. and Medicare, plus 22% for imbedded taxes and compliance costs. Even without a prebate, the Fair Tax is a better deal.

    The poor really make out with the Fair Tax plan. If they are earning the poverty level or less, they pay no tax. With our current system, even if they have no income tax liability, S.S. taxes and Medicare are deducted from their paychecks, plus they pay imbedded taxes and compliance cost when they make a purchase.

    Mr. Gale also makes this statement “The number of people without health insurance, for example, would likely rise by more than 10 million. But if we exempt any of these items, the required rate would have to rise.” This is ridiculous! If anything more people will have health insurance. I am in the health insurance business. The imbedded taxes and compliance cost in insurance premiums is huge. You may even see health insurance premiums come down. Plus, many companies who currently are unable to afford health coverage because of corporate tax burdens will now be able to cover their employees.

    Other than tax lobbyist and criminals, I can’t see how anyone can be against the Fair Tax.

    Steve Keller  ·  Oct 31, 2005 at 12:55 am  ·  Permalink
  4. William Gale does not take into consideration that imbedded in that original $100 cost of a product is the cost of tax compliance i.e. tax attorney, accountant, bookeeping cost associated with paying taxes not to mention passing the cost of the taxes paid on to the consumer in the price structure of the item. With the removal of these hidden costs it reduces the cost of the item by about 22 percent and when you add back in the 23 percent national sales tax it increases the final cost by about 1 percent at best. Pretty much a “wash” or revenue neutral.

    Lynnie Gregory  ·  Jan 21, 2006 at 1:21 am  ·  Permalink
  5. i’m not anti-fair tax, i’m happy the discussion is progressing (whether it ends up being fair tax or something else, i think there’s got to be a better way), but i think you’re assuming a lot if you think the ‘hidden costs’ will be stripped out. many/most businesses will just tack on the 30% and hold their hands up, “what can i do? it’s a federal tax…” as always, what is paid defines what it’s worth, what is charged is what it costs.

    jd  ·  May 31, 2006 at 8:14 pm  ·  Permalink
  6. Enjoy your ability to criticizen/question the FairTax while you can…because it’s about to be taken away…

    The Americans For Fair Taxation (fairtax.org) are on a mission to squash out any public criticism of the FairTax plan and are attempting to exploit the federal trademark system for the ADMITTED purpose of being able to shut down anti-FairTax websites during the upcoming elections. They have an open application to obtain a service mark for the word “FairTax.” Genie Hayes, the communications director for AFFT, openly admitted that the goal of AFFT is to get this service mark and be able to yank any anti-FairTax websites as well as to have total control over any shirts, bumper stickers, or anything of that nature that is printed with the word FairTax. They are attempting to get the strong arm of the federal government to back them up in hindering free speech and open/honest debate.

    The FairTax is promising to become a rather prominent issue in the upcoming Congressional elections–and if AFFT succeeds in obtaining this service mark, they are going to be in an excellent position to keep people from criticizing the FairTax Act.

    The time for opposition to their application is fast approaching. I know that an application for a service mark can’t be opposed just because the applicant’s motive is unethical. However, I do believe that there is a very STRONG case that AFFT doesn’t meet the legal requirements for obtaining a service mark.

    Unfortunately, as it stands right now, I think they’ll win their service mark and they’ll be on the road to having the power to tell people that they cannot participate in public debate regarding H.R. 25. Perhaps, at least, the public will be informed of this attempt to filter open and honest critiques.

    MoMospy  ·  Aug 8, 2006 at 10:42 am  ·  Permalink
  7. MoMospy

    Sorry to be the one to have to inform you.

    All a service mark does is prevent another organization or person from claiming the use the same title in connection with another organization or document.

    It certainly does not prevent its use as a reference in discussion or debate of any kind.

    Suggest you find something real to get upset about, this one isn’t it.

    yetanother  ·  Aug 10, 2006 at 9:56 pm  ·  Permalink
  8. jd, please read the FairTax book and the FAQs and research at http://www.fairtax.org. Then read the FairTax book again.

    Chad Sargent  ·  Aug 12, 2006 at 6:05 am  ·  Permalink
  9. […] “Countries that have tried to enforce retail sales taxes at rates above 10 percent have uniformly given up because of evasion.“ Source: William Gale’s Argument Against the FairTax […]

    The FairTax: Attacks and Facts « The Third Rail  ·  Apr 15, 2007 at 12:00 am  ·  Permalink
  10. “Countries that have tried to enforce retail sales taxes at rates above 10 percent have uniformly given up because of evasion.“ Source: William Gale’s Argument Against the FairTax […]

    This is a specious argument. He cites no examples. I posit that those countries (if any) were trying to add a high retail sales tax on top of income, vat and other taxes. Let us know what countries and what circunstances. This guy sounds like the employee of a tax service.

    Sam Douthit  ·  May 4, 2007 at 9:31 am  ·  Permalink
  11. I don’t think we’ve really discussed the “underground economy” that Mr. Gale says would thrive. As far as I understand it, as used goods are not taxed, this could create a problem with many people selling “used” goods the way they do at flea markets and such. Any thoughts?

    Jessica  ·  May 6, 2007 at 12:22 am  ·  Permalink
  12. Jessica – Elsewhere I have written that the fear of a huge underground economy is misplaced. There will be some evasion and avoidance. Today there is a huge problem with evasion (illegal) and avoidance (legal) of taxes.

    84% of retail sales are made by large retailers. It will be very difficult and very dangerous to their business interests to evade the consumption tax. How would a Walmart instruct it’s employees to evade the tax? How would the employee benefit from scaming the system? How long before the scam would be uncovered? How would a Walmart operate without a business license?

    Flea markets have relatively small volume. How would they acquire products to sell? Theft? Self made? Smuggled from another country? If purchased legally they would need a business certificate to be exempt from paying the tax when purchased. Registration makes the transactions traceable. Audits can and will identify scams of material amount. These people will be fined and possibly incarcerated for tax evasion. The tax loss will be small. I doubt these transactions show up in consumption statistics today and thus are not included in the calculated Fair Tax base.

    Remember prices are going to fall when corporate payroll and income taxes along with compliance costs are eliminated. Competition is going to force business to reduce their prices. Walmart pays $10 for an item today. Walmart knows that the supplier has received a 10% or more reduction in his costs. If Walmart doesn’t get the product for $9, they are going to find another supplier. Now Walmart can sell the product for 10 percent less. Are Target, Kroger and other competitors going to let Walmart have a huge price advantage?

    Initially product prices including the Fair Tax will increase by 17% based on a Fair Tax rate of 23% inclusive. Over time prices will probably fall even more as wages are either reduced or do not grow. Competition will again force salaries and wages to be realigned to the current balance. Remember under the Fair Tax, initial NET salaries and wages will jump by 7.65% (9% tax exclusive) for the payroll tax elimination and another estimated 10% (tax exclusive) on average for elimination of income and estate taxes.

    As an auditor/accountant by trade, I believe that evasion/ and avoidance under the Fair Tax will be much less than today and will be easier to audit. There is no way that Fair Tax rates are going to reach anywhere near the levels that Gale and others guess they will. If congress chooses to take a larger percentage of GDP in taxes, the Fair Tax rate will increase. That is a problem with excess government spending not with the Fair Tax.

    Marvin Ammentorp  ·  May 9, 2007 at 2:45 pm  ·  Permalink
  13. For those who are interested in being informed, here’s a link to the Presidential Advisory Panel who looked into this concept in 2005 amongst other tax reform options. Here’s the main page.

    http://www.taxreformpanel.gov/final-report/

    Here’s Chapter 9 that deals with the “Fairtax”

    http://www.taxreformpanel.gov/final-report/TaxReform_Ch9.pdf

    Brian  ·  Jan 17, 2008 at 8:04 pm  ·  Permalink
  14. Under a Fair Tax system, evasion will be massive. Just because “84%”, wherever you got that number, of retail sales are made by large retailers, what makes you think that number will stay the same if a national sales tax is enacted? It won’t. Smaller businesses need to provide incentives to consumers who purchase from large retailers. What better way to get people in the door if the consumer doesn’t pay sales tax? Or maybe pay only a portion? These businesses will become the underground market and people will want to shop at these business, because, in reality, people don’t like paying taxes and will do things to avoid them. Sales tax evasion runs rampant in all states which have them, and these are states that only have a 6-9% sales tax. Imagine what happens when you have a sales tax of 30%! Studies have already shown any sales tax over 10% will be subject to massive evasion. And since the IRS is abolished under the Fair Tax plan, who is to stop these businesses from doing this? Who is going to make sure businesses are reporting the correct amount of sales and sales tax? Quite a loophole there. Once you ask yourself this question, you will realize the “IRS” is going nowhere, but it will take on another form. Some independent agency with authority must exist to ensure proper collections. Without a collection agency, business owners can manipulate their records to no end since no one is looking after them. Do you think the government is going to allow business owners be the final collector of tax? Never. Ever. Maybe the IRS will be gone, but a new collection agnecy will have to exist, which will be the theoretically same as the IRS. Except they won’t audit your income, they will audit your personal belongings and demand receipts for everything that you have. Yea, fun.

    This is where you say the Fair Tax and abolishing the IRS is a scam. Abolishing the IRS will never happen, its a joke and anyone who thinks it can happen is living in a dreamworld.

    Josh  ·  Jan 25, 2008 at 12:32 am  ·  Permalink
  15. This proposal hurts the lower-middle class more than anyone. The idea that people in this bracket can get away with spending only 50% of their income is laughable. In reality, this hurts consumption based markets, and largely benefits the wealthy, who spend far less of their income in consumption, and gain most of their income from capital markets. This is yet another veiled attempt from the rich to lower their tax burden.

    Let us also not forget that a federal consumption tax would be illegal, as enumerated in Article 1 Section 9 of the Constitution: “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herin before directed to be taken.” The federal income tax is only legitimate because of the 16th amendment, which specifically authorizes it.

    Sean  ·  Jan 29, 2008 at 6:55 pm  ·  Permalink
  16. IF A GOOD IDEA IS A GOOD IDEA IT DESERVES CREDIT WHERE CREDIT IS DUE, DESPITE WHO CAME UP WITH IT-!!! ATLEAST PEOPLE IN THIS COUNTRY WILL (SOMETIMES) THINK “OUT OF THE BOX” AND I THINK THAT CAN (SOMETIMES) BE A GOOD THING-!!!!!!! I PERSONALLY FEEL LIKE IT CAN BE GOOD FOR A SOCIETY TO HAVE PARADIGM SHIFT (AT TIMES)… ALSO- I FEEL LIKE EVEN WITH THIS NEW PARADIGM BEING PROPOSED, THAT IT MAY VERY WELL HAVE SOME “DRAW-BACKS” AS WELL…?? BUT- I FEEL AS THOUGH THAT THIS PARTICULAR MATTER IS SO COMPLEX, THAT THE ONLY (REAL) WAY FOLK’S WILL EVER ((REALLY)) KNOW WHETHER ONE SYS IS OVERALL BETTER THAN THE OTHER SYS- IS TO SIMPLY “TEST-FLY” IT AND SEE IF (THE MAJORITY) OF PEOPLE LIKE IT-??? WHETHER THINGS WILL DEVIATE FROM THE PRECEDENT OF THE ESTABLISHMENT THOUGH, IS PROBABLY UNLIKELY… I THINK WE ALL KNOW HOW MUCH AMERICANS AND MANY PEOPLES, HATE AND DESPISE- CHANGE-!!!

    Jeff Farmer  ·  Feb 3, 2008 at 4:55 pm  ·  Permalink
  17. I still think the major problem is that retailers are not going to consider it “even”, and are going to add the tax amount to the existing price. Consider this: they purchased an item for $50 with all the hidden taxes in place. They are selling it for $100 (as far as I can tell, many small businesses double the cost for a retail price.) At any rate, they were expecting a $50 profit on this hundred dollar item (before expenses.) Now they will be expected to pay $27 in taxes to the government? No, they won’t include it in the retail price. They will ADD it to the retail price. Even if there was a period to allow them to sell old inventory, it is too entrenched. They’ll see it as a way to increase their price while blaming the government.

    laurel  ·  Nov 3, 2008 at 1:13 am  ·  Permalink
  18. Laurel,
    If you are saying retail merchants will act in their economic self interest and attempt to maximize their profit, you’re right – as long as competition will permit them. However a retailer who breaks ranks will get the business if there is any elasticity in demand for the produce.
    ~Jim

    Jim Bennett  ·  Nov 3, 2008 at 3:47 am  ·  Permalink
  19. Jim/Laurel,

    I sort of think you both are looking at this thing from the wrong angle. I don’t think it will be a matter of maximizing profits, but simply surviving as a business. In the first week or month, (depending on the business size), the retailer will have to write a tax check to the government for almost 40% of their cost plus profit. (Using the Rice study and accounting for the inventory tax credit). Marginal businesses that haven’t any profits yet will have to raise their prices by that 40% just to stay afloat. But established businesses may decide to eat some of the tax burden- perhaps even to their break even, no profit point—and try to force the competition to fold. It seems to me that there will be chaos within the 20 million small business community, and there may not be many survivors. Lots of business failures, layoffs, etc. and the economy could well tank.

    Another reason to phase this tax scheme in over a period of years. Think Fairtax-Lite!

    Hank Van Gieson  ·  Nov 4, 2008 at 11:04 am  ·  Permalink
  20. If the fairtax proposal was modified to tax all purchases of options, bonds, stocks, land and all rents as well, I’d probably come closer to being able to support it.

    As it is, it’s a pretty shallow attempt at making rich people get out of a equal share of taxation.

    It would also require a constitutional amendment, and frankly, I think there are about 10 other things that would be more likely to end up actually getting passed and ratified.

    Michael  ·  Nov 7, 2008 at 5:04 pm  ·  Permalink
  21. I fail to see how this system will help the rich. With the Fairtax prebate covering spending up to the poverty level, the poor will essentially pay no taxes!!! And the rich, who tend to spend more on luxury cars, yachts, etc, will pay more.

    David  ·  Jan 4, 2009 at 3:49 pm  ·  Permalink
  22. David, The FairTax does claim to decrease taxes on higher income, as it does to all income classes by broadening the tax base and taxing wealth. A study by Laurence Kotlikoff and Sabine Jokisch concluded that the long term effects of the FairTax would reward low-income households with 26.3 percent more purchasing power, middle-income households with 12.4 percent more purchasing power, and high-income households with 5 percent more purchasing power.

    I guess the debate depends on how you define “rich” and how you measure the time line. If you define it by income using a cross-section time frame, consumption will fall as a percentage of income, as income increases for a given year. Classical economic analysis indicates that the marginal propensity to consume (MPC) decreases as income increases. Households at the lower end of the income scale spend almost all their income, while households at the higher end are more likely to devote a portion of income to saving. In this view, it would help the “rich” (more correctly, higher income).

    However, MPC and income elasticity of demand tend to increase as wealth increases. These facts explain the apparent contradiction in the data; households at the extreme high end of consumption often finance their purchases out of savings, not income. So if “rich” is defined by wealth, then they may pay more. In a larger time line view, the savings would be taxed when it becomes a purchase. Income earned and saved would not be taxed immediately under the proposal. In other words, savings would be spent at some point in the future and taxed according to that consumption.

    Morphh  ·  Jan 5, 2009 at 7:43 am  ·  Permalink
  23. The so-called “Fair Tax” is just a disguise to lower the tax on the richest Americans and continue to made the divide greater between the rich and poor in America.

    I’m an unemployed senior citizen, not yet eligible for Social Security. I have little income. I have to spend virtually every penny I earn to pay the bills. My income tax is almost non-existent at this point in my life. Why would I trade the income tax for a point of sales tax? Of course, I would not. There is no advantage for me.

    Sales taxes hurt the poor the very minute they have to pay them because they have to decide what they cannot afford to buy because the tax is added when they purchase something.

    I think using the term “Fair Tax” is clever. However, there is no such thing as a fair tax. Using the two words together is an oxymoron. Any tax is unfair to someone, therefore making it unfair. This includes your tax plan, the income tax, sales taxes, VAT, etc.

    Roger  ·  Apr 4, 2009 at 10:37 pm  ·  Permalink
  24. Roger,

    I understand your frustration, I am in your age group and under-employed myself. But you are still paying some income taxes and the income tax code makes it far more difficult for you to recover. You are making a common error in believing that income is equal to wealth. This is not true. By taxing income the IRS is applying an excise tax on the profit derived from the specific activity of earning wages and salaries. Income taxes apply to a very narrow group of individuals that are at the lower to middle end of the wealth scale. As individuals get wealthier the less they rely on earnings from income as decribed by the IRS. The Fair Tax shifts the tax off of income and puts it on consumption because it’s a better way to tax wealth and apply it to a much larger group which lowers the real tax liability on each individual. Untaxing income increases buying power and removes barriers to upward mobility. The Fair Tax adds the prebate to cover the amount of the tax up to the poverty line to untax basic needs. By removing the taxes on income and untaxing the basic needs to the poverty level the Fair Tax would make it easier for you to work your way back up the economic ladder.

    RMForbes  ·  Apr 5, 2009 at 4:57 pm  ·  Permalink
  25. Roger, did you understand any of RMForbes reply to you? I sure didn’t. Just a bunch of double talk. But kudos to you Roger since I know now that I’m not the only one that realizes the burden the “Fair Tax” would impose upon those living on their already strained Social Security incomes.

    I am still waiting for a proponent of the “Fair Tax” to explain to me how I would benefit from paying no income tax since I live on a low fixed income from Social Security to paying a 20-something percent sales tax when I can barely afford to purchase the essentials already. Last I heard the rate would be 27 per cent.

    I don’t believe anyone can explain it, because that is the flaw in this ridiculous idea. And don’t tell me that the tax doesn’t apply to “the necessities” because who are you to tell me what I need? Sometimes I enjoy purchasing something other than enough food to keep me alive when I can afford it, which isn’t often. And I’ve been known to own a pet or 2, and the cost of pet food is already disproportionate to other items, and that will be taxed.

    And any of the lower income working class that think they will benefit from being able to keep all of their paycheck will only be selling themselves out down the line when it comes their turn to retire and they find themselves in the same situation as Roger and myself.

    Mark Accoster  ·  Apr 20, 2009 at 8:49 am  ·  Permalink
  26. Mark, couple things… SS income is indexed to the after tax price changes, so this income would essentially be tax free (as it would be increased to cover the cost of the tax). In addition, you would receive a monthly check to cover the tax up to the poverty level (at least $2,392 a year) for whatever you define your necessities to be. It is likely that you would make out ahead under the FairTax, as low income seniors are reported to make out the best under this plan, with a negative effective tax rate. As for workers, do you understand the value of accruing interest for retirement on tax free savings? Also the economic benefits from a consumption tax over an income tax has large implications for the overall lifestyle and future tax burdens of workers.

    Morphh  ·  Apr 20, 2009 at 9:10 am  ·  Permalink
  27. Mark, one other thing to keep in mind… How do you think a company pays the employer portion of the payroll tax? How about corporate income tax? You are already paying taxes with every purchase you make. It’s simply a component of the price of the products you are already purchasing. The FairTax at least removes the smoke and mirrors from regular retail purchases and puts the tax component on the receipt for you to see. Now, before I get jumped on by the opposition, yes there will be an increase in taxes to offset the tax paid by government entities on their purchases also. Many will say that this is anything but transparent and simply hides a portion of your true tax burden in state/local taxes. I never said the FairTax was purely Nirvana.

    Scott  ·  Apr 20, 2009 at 9:44 am  ·  Permalink
  28. Mark,

    I guess we are fundimentally different, if I don’t understand something I investigate it until I do. If I disagree with someones argument I tell them where I think they are making an error. I don’t just dismiss their entire argument as doublespeak. That’s not very polite. If you think I’m wrong, tell me how and why. Give me a chance to rebute your arguments. That’s how debate is done.

    RMForbes  ·  Apr 20, 2009 at 12:56 pm  ·  Permalink
  29. I can see this has become a hot topic again with all the current events.

    RMForbes, I didn’t mean to be rude, and perhaps you have a valid point somewhere in there but you’d have to put it more plainly so an average person like me can understand. I’m no economics expert and I don’t understand exactly how the whole system works, but I understand when it takes money out of my pocket.

    Morphh, I don’t know if it’s true that I would get any extra money through Social Security. Where does it say that? I could only find vague references to a prebate, if that’s what you mean. But I would have to know up front exactly who gets what and how much before I digress.

    I can tell you this much right now, if I have to pay a 23 per cent tax at the point of sale I would need about $2000 more a year just to break even, and that’s only the essentials to survive. Many bigger ticket items will be beyond my means with that much tax. I will be forced to buy most of my goods used, if they are even available anymore. I imagine used goods will be in demand and thus harder to obtain.

    I also don’t know how much I buy the argument that the price of goods will become lower. The suppliers may be able to obtain them cheaper from the wholesaler. but demand is what determines the value to the end buyer. I think it would be far more likely to see price gouging on the most needed items.
    a change in the tax system will not change the greed in people’s hearts.

    I have nothing against a system that works for everyone but you are talking about a lower standard of living for millions of senior citizens or others on a fixed income.

    Mark Accoster  ·  Apr 20, 2009 at 9:25 pm  ·  Permalink
  30. Mark, I will definitely let Morphh handle the explanation regarding SS payments being adjusted as this is not something I am familiar with. However, you go on to talk about adding a 23% tax at the point of sale and prices not falling. Even the most ardent opponents on these boards I think agree that prices will falling leading to a net price increase after the FairTax is applied of about 15%. This is still a price increase, so you are just in being concerned about this.

    However, since the prebate is designed to “untax” spending up to the poverty level at the FairTax rate of 23% and the actual price increase will be more like 15% (best estimate) that stretches the prebate dollars further. As to your argument regarding individual and corporate greed, this is the driving force as to why prices will fall. If I were making a product and my production price dropped by say 18%, I would be insane NOT to reduce my retail price for fear that one of two things might happen. First off, my consumers may decide that they simply can no longer afford my product due to the new FairTax and find an alternative, therefore eroding my customer base and potentially reducing my profits. The more likely option is that my competitor making the same basic product will cut his retail price by say 10% to undercut my now excessive (purely in terms of profit per unit) price and capturing himself a large portion of my previous market share. Additionally bad for me in the second scenario is the fact that the public now views my competition as being fair in reducing his price with the implementation of the FairTax and myself as being simply greedy.

    A price increase is absolutely sure to happen with the implementation of the FairTax. This is one place where I will agree with the FairTax opponents that some on the side of the FairTax are not presenting an honest argument. However, the prebate helps to offset this, and for retirees the SS adjustment will also help with this. Additionally, since the price increase after the FairTax is applied will be significantly less than the 23% on which the prebate is based, this makes the prebate actually cover more than just poverty level spending.

    Scott  ·  Apr 21, 2009 at 6:53 am  ·  Permalink
  31. A price increase in products under the Fair Tax isn’t a forgone conclusion. The price of a product is determined by the total cost of production, plus profit.

    When the cost of production goes down, because of decrease in some aspect of those expenses that make up the cost of production, the product can be sold for less. A seller who can sell for less will sell more, until his competitor matches his price. When similar products sell for a similar price, then competition takes place based on other things such as quality, advertisement, availability, and other considerations, I’m too lazy to think of right now.

    The point is that the (free) market always seeks equilibrium. Equilibrium is the point where supply equals demand. The price is a derivative of that equilibrium. So, assuming the costs of production go down, then, the prices will ultimately fall.

    While I’m not altogether sold on the “Fair Tax”, we do need to try to establish the basic facts, so we can reach logical conclusions.

    Finally, why is it a given that a progressive tax system is a fair system?

    Chuck Curtis  ·  Apr 25, 2009 at 6:04 pm  ·  Permalink
  32. Chuck,

    Assuming prices on average are in equilibrium under current tax law, and producer costs can be reduced by 10% under the Fairtax, then it is a mathematical fact that prices will rise by 17% after adding the 30% sales tax. (1.00 x .9 x 1.30 = 1.17)

    Hank Van Gieson  ·  Apr 26, 2009 at 4:55 am  ·  Permalink
  33. Hank,

    This mathematical fact works only assuming producer costs can only be reduced by 10% which, imho, is a completely erroneous assumption. In fact, if I remember right, you have admitted that real prices will stay the same, so the 17% is only in nominal dollars, i.e. inflationary.

    Chuck,
    As far getting the facts straight, you are starting out great.

    “Finally, why is it a given that a progressive tax system is a fair system?” It’s only a given to progressives.

    Andrew Martin  ·  Apr 26, 2009 at 10:26 am  ·  Permalink
  34. In this whole argument eveyone leaves out how much the profit margin is being inflated by the current income tax system. While I understand that some businesses run very low profit margins and this would not have a huge impact but some industries have very high profit margins and it would make a significant difference to the bottom line. I work for a POS software company and work with many different types of retail businesses and these business owners see their profit as their gross earnings. They pay income taxes on these profits and live on the rest. Their take home pay is their gross profit minus income/payroll taxes. If the income/payroll tax were removed these business owners could reduce their profit margin by at least 25% and still end up with the same take home pay. This would also reduce prices to the customer. If a business is running at a 40% profit margin which is quite common in retail and the profit margin is reduced by 25% that would result in a posible 10% lower price.

    RMForbes  ·  Apr 26, 2009 at 12:46 pm  ·  Permalink
  35. Andrew,

    We have probably been over the price arguments before, but for Chuck’s benefit, here is a short version of why I believe that producer costs can only be reduced by 10% and retail prices will rise 17%.

    Using the revenue data from the Kotlikoff/BHI base/rate study, business income taxes raised $290 billion in 2007, and the business share of FICA contributions was $435 billion. Compliance costs are $265 billion according to AFFT. Retail sales in 2007 were $9.5 trillion. , including durable and non durable goods, plus services. As a percent of retail sales, average business costs for income tax was 3.0%, for FICA 4.5%, and for compliance costs, 2.7%. Add them up and the average business costs of the income/payroll tax is 10.2%. Because compliance costs include both business and personal costs, I’m not ashamed to simply claim that the average business cost is 10%!

    If you aren’t fond of that approach, start with the 1998 Jorgenson embedded cost study which showed that embedded costs were 22% across 35 business sectors. Jorgenson included employee income withholding and FICA contributions, but did not include compliance costs. Again, using the Kotlikoff data, two thirds of the 22% embedded costes can be attributed to employee taxes which leaves one third of the 22% or 7.3% for business costs. Add the 2.7% compliance costs and it looks like 10% is still valid.

    You are welcome to your humble opinion that my estimates are “completely erroneous”, but now you need to fully explain to Chuck just why you believe I’m wrong.

    Hank Van Gieson  ·  Apr 27, 2009 at 1:13 am  ·  Permalink
  36. Hank,

    Let’s be clear. Your estimates are fine, mathematically. It’s the assumption that personal income/payroll tax is a cost carried 100% by labor that is erroneous. It goes back to our favorite debate about working for gross versus working for net. Since you’ll never answer, I’ll address this to Chuck. All else being equal would you rather have a job for $150k that has a 0% income tax or one for $200k with a 50% tax? The answer tells you whether or not you work for gross or net.

    Maybe this will help you though Hank. I remember you stating earlier that you believe the current cost ratio of new to used goods will be the same under the fairtax as it is today. I agree (once the transition to equilibrium is complete). Today there is also a ratio of what an entrepreneur takes home to what someone that simply contracts out their labor takes home. You’ve at least conceded that the entrepreneur will lower their costs, so that they receive the same profit they always have (or at least I think you have). But you believe labor will receive what they always have, regardless of a decreased tax burden. That necessarily means that ratio of what the entrepreneur takes home to what labor takes home will be decreased. In other words, income inequality will be reduced. Do you really believe that will be a side effect of the fairtax?

    Again, even after the transition to equilibrium, labor will take home more than it used to relative to ownership. Isn’t this what you are suggesting?

    Andrew Martin  ·  Apr 27, 2009 at 6:54 pm  ·  Permalink
  37. My understanding is that the figure of 23% was derived as the percentage of national sales tax revenue that had to be realized to achieve revenue neutrality. I believe that was under the assumption that the costs of production and ultimate product prices would be the same as they were, before the change was made.

    We can discuss this based on a percentage over the price as a tax figure, or full price including the taxes, as long as we discuss them in the same way. In other words, both exclusively or both inclusively.

    I understand that the initial study that produced the idea of a national sales tax, started with the challenge, “Design a tax system to replace the system we have now? It must produce the same income to run the national government and it has to exempt the basic cost of living.”

    Assuming the conditions are met, my question would be whether the tax burden has been unfairly shifted from one part of society to another. If we can answer that question by showing that nobody is unfairly burdened, why wouldn’t we opt to tax consumption to pay the cost of governing ourselves?

    Consumption pays all costs, plus profit, as incentive to produce. Labor, which is part of costs gets taxed as a cost and taxed again as labor. What is so damned equitable about that?

    What we have with the present system is a conglomeration of totally unfathomable rules and regulations that evolved from interests seeking favors from the system to feather their own nests at the expense of others. (“I’m only asking for a ‘fair’ advantage.”????)

    One of the costs of production is the expense of obtaining those favors. Another is the cost of taking advantage of favors within the code.

    Because of the tax code a large portion of society has been disenfranchised.

    Getting rid of the present tax code would be a huge step toward reducing unfair pockets of power and influence in our society.

    We would no longer need the amount of government we have, because government would no longer be in the business of granting favors to vested interests, including the vested interest that government has become.

    (Maybe we will wake up and rescind the privilege of citizenship to corporations, also.)

    That’s probably why it won’t happen. There are too many vested interests, including government itself, to ever allow it to happen.

    Unless . .

    Unless, we are still American enough in our heads to want to do it. And, I believe we are.

    My confidence has been buoyed by the recent tea parties around the country. There truly are self evident truths in which we Americans still believe.

    The tax objections at the loose central core of the tea parties are a symptom of the unrest true Americans feel. The real crux is where we are now, as our society has evolved. There is a general discomfort, even among those who don’t even understand our history or our roots.

    I don’t think anyone can defend the present tax system. We can argue about the form a new tax system should take and we should have that discussion.

    But what we really must do is repossess our country, based on our Declaration of Independence, which is a declaration of our “national religion”.

    If we don’t do the latter, we aren’t going to get the former. And, worst of all, those of us who still believe in this great experiment will have to find a place to start the experiment anew. Because without that devotion and renewed commitment, a commitment that has been made repeatedly by those who were charged before us with guarding this birthright, we will have forsaken those who lived, fought and died to continue the dream of our forefathers.

    So, I hope to see all of you at those future tea parties. And I hope we can debate the various aspects of the Fair Tax and any other system of taxing you want to debate as we march along on the way to regaining enough control of our own destinies to actually redesign our system of taxing.

    Chuck Curtis  ·  Apr 27, 2009 at 11:18 pm  ·  Permalink
  38. So the question on 30% versus 23% can be answered with the proper formula. However, the truth is that they are both correct. 30% is your markup 23% is your margin. But before I show you this people need to understand this is common practice with retail, distribution and manufacturing. Retailers, distributers and manufacturers use a GROSS MARGIN formula to calculate price. It’s an industry standard.

    Cost = $77.00
    Gross Margin Percentage = 23%

    Gross Margin Formula: 100 = 77/(1-.23) That’s it.

    So the markup would be 30% or (77 * .30)
    Gross Margin is standard and it tells you your actual profit in dollars.

    I wish they would explain this in the fairtax book or on the website. It is common practice. You can find a full explanation on Gross Margin on wikipedia.

    Peter Walsh  ·  Aug 18, 2009 at 11:10 am  ·  Permalink
  39. peter, it’s explained ad nauseum in both linder/boortz books and just about everywhere else that the FT is discussed.

    some people aren’t capable of understanding it, while other people are capable of understanding it, but refuse to do so.

    for demagogues, it’s easier to yell “the rate is 30% not 23%!!” than it is to yell the more accurate and less pejorative statement “the rate is 30% when figured like sales taxes, and 23% when figured like income taxes!!”

    Justin  ·  Aug 20, 2009 at 11:14 am  ·  Permalink
  40. Wow..this thread has been going for several years now. IMPORTANT: For those of you concerned that retailers will not adjust their pricing, I point you to the airline industry. Once the ariline tarrifs (aka taxes) were removed, the insdustry began dropping prices as they were competing hard and fast for our business. The cost of flying has not increased over 20 years at the same rate as a gallon of milk or apple juice. Prices may take a while to drop, but the they will drop, and wihle FairTax is no Nirvana as someone already mentioned, the long term benefits of the Fair Tax will benefit us all. How nice it will be to have drug dealers and illegals paying into the system when they purchase their gallon of milk or apple juice.

    Tboo  ·  Feb 12, 2010 at 6:21 pm  ·  Permalink
  41. It is important to look at Gale’s argument and notice He gives little to no examples or statistical proof of what He is saying. He also does not mention the embedded taxes on retail items or the repeal of the 16th amendment. It is a very one sided argument.

    wes  ·  Jun 26, 2010 at 12:24 pm  ·  Permalink
  42. Wes — Here is Gale’s full detailed analysis (which is available in the Research section above.) His approach has been adopted by other economists who have tried to analyse the required rate for the FairTax, including those who support the FairTax.

    http://www.brookings.edu/views/articles/gale/20050516.pdf

    The so-called “embedded taxes” argument has been kicked around to death on this board. Without going into details, its safe to say the impact of the FairTax on the so-called embedded taxes has been greatly exagerated. Even Boortz and Linder admit that in their last book.

    The repeal of the 16th Amendment would require the affirmative vote of 2/3s of both houses of Congress, and 3/4 of the state legislators (or vice versa). It ain’t gonna happen.

    Of course Gale’s arguments are one-sided. They were made to rebut Linder’s one-sided argument in favor of the FairTax. The only place you’re going to see both sides of the argment is on this board. So keep reading!

    Hayden Kepner  ·  Jun 29, 2010 at 1:59 pm  ·  Permalink
  43. Just want to add a thought concerning the likelihood of getting the FairTax passed.

    Quite simply, the FairTax can and will pass when there are enough US Representatives and Senators, as well as members of state legislatures who agree to pass it.

    According to the Bill Summary & Status 111th Congress (2009 – 2010) (http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR00025:@@@P.com) there are now at least 5 US Senators and 62 US Representatives who are co-sponsors of the FairTax bill.

    November’s election will more than likely send a large number of freshman representatives and some senators who will also support this bill. 2012 will add still more support. The tide is turning and the chance of this bill eventually becoming law is quite good.

    Joshua Warren  ·  Jul 4, 2010 at 4:02 pm  ·  Permalink
  44. Joshua,

    I don’t want to rain all over your parade, and you are entitled to your opinion. But the facts suggest that support for the Fairtax is softening lately, not increasing. The number of cosponsors peaked in the 110th Congress at 72, and I have a small wager with Jim Bennett, a NJ Fairtax leader, that that number won’t be exceeded in the 111th or the 112th. Want to risk $10 to prove me wrong??

    With John Linder retiring this year, it remains to be seen if anyone picks up the Fairtax banner. Of special interest would be the fate of Rob Woodall, Linders AA, who is moving from DC to Georgia in order to run for Linders seat. Does Georgia want to continue to elect a Fairtax champion or are there more important issues? Twelve years of flogging the Fairtax scheme and not one public hearing. How is that progress?

    Stay tuned!

    Hank Van Gieson  ·  Jul 10, 2010 at 7:48 am  ·  Permalink
  45. What were the specifics concerning nations that had huge underground marketsevasion with a sales tax that Gale mentioned?

    Were these nations operating under a tax system even remotely similar to that proposed in the Fairtax bill?

    Razvedka  ·  Jul 23, 2011 at 2:57 pm  ·  Permalink
  46. my fair tax plan would have a 23% user tax with food, housing. medical care exempt. eg. instead of paying 100 dollars for a pair of Nike, you buy a 20 dollar pair of Keds. No more deductions eg payroll tax, no corporate loopholes. No more underground economy eg contractors who work for cash would be paying the tax on the materials they use, same idea would also cut out the scam illegal immigants use. would still have medicare and social security deducted.

    larry  ·  Sep 21, 2011 at 10:24 am  ·  Permalink
  47. The fair tax does apply to used goods. Bartered items are taxed at their fair market value. Since bartered goods are mostly used, I can assume the Fair tax applies to used goods. The fair tax also applies to rent, utilities, insurance, gas, and medications. Anything that the government defines as property or a service is taxed.

    Scott Reisert  ·  Nov 5, 2011 at 2:38 pm  ·  Permalink
  48. Scott, your assumption is wrong. Bartered goods are treated just as priced goods. A bartered good can be new or used. If it’s new, then the FairTax applies, if not, then it doesn’t. It’s just a method to prevent people from avoiding the tax by exchanging new goods. Used property is also not taxed, unless you build something new on it. The other services are new by the nature of what they are – can’t have a used service or utility.

    Morphh  ·  Nov 7, 2011 at 9:50 am  ·  Permalink